uWorld CPA - FAR - Ch.13 - Payables and liabilities

Gross Method

Records purchases at full purchase price

Record discount later as cost of sales

Net method

Records purchases with discount taken

If discount ends up not being taken, discount becomes expense. (interest expense

Dividend in arrears on cumulative preferred stock

Not a liability

Must be disclosed in notes to financials.

FICA (Federal insurance- social security / medicare)

7.65% - Employee share (withheld by employer, payable to govt by employee)
7.65% - Employer's share

FUTA

Federal unemployment act

SUTA

State unemployment tax act

When you declare a dividend, do you debit dividends expense or retained earnings?

Retained earnings

Dividends are a direct reduction of equity, not an expense.

How is warranty liability recorded?

At the time of sale, expense the estimated warranty expense and credit warranty payable liability

Repairs reduce warranty payable.

When do vacation liability accrue?

Only if following are met

1) Employee rendered services
2) The benefit vests (unused is payable upon termination) or accumulates (can be used in future periods)
3) Payment is probable and can be estimated

Vest or accumulate = get to keep the benefits earned. If not vested, lose rights.

Order of dividend payment

Dividend in arrears

Preferred annual dividend

Common shareholders


E.g. if you have $12,000 of preferred dividends in arrears and declared a $44,000 dividend, where preferred stock is 6% $100 par value 4,000 shares,

You'd pay Preferred dividend the $12,000 in arrears first, then the (.06 * 400,000 = $24,000 annual preferred dividend first. So preferred get $36,000. Remaining $8,000 from the $44,000 go to common.

Accretion

An amount recognized as an expense resulting from an increase in the future liability of an asset retirement obligation. Generally, the credit-adjusted risk-free interest rate that existed when the liability was created is used to calculate the expense.

Each accounting period, accretion is recorded to increase liability's value to eventually equal future obligation. The expense can be considered interest cost associated with the obligation.

Accretion expense = FV of the Asset retirement obligation x credit adjusted risk free interest rate

Asset retirement obligation

Liability associated with retirement of tangible long lived asset, such as restoration/removal.

Generally recorded at FV of liability (PV of future payments to satisfy obligation, using the credit adjusted risk free interest rate), by increasing the liability.

When acquired, capitalize ARO as part of asset cost.

To record initial ARO
DR Asset
CR ARO Liability

Noninterest bearing note

Example: $1,000 noninterest bearing note, discounted at 10% maturing in 1 year

Borrower receives less cash than face amount (face amount less interest)

Borrower repays the face amount of the note

Cash received $900 (10% discount)
At maturity, borrower pays $1,000 to lender (repayment of $900 received + $100 discount)
A cost of $100 to borrow $900 = effective interest rate of 11%, higher than discount rate 10%

Do you accrue both employee and employer's share of payroll taxes?

No only employer's share.

You have a 4 year note payable. It's year 3. Do you reclass it from noncurrent liability to current?

Yes

What does it mean if a preferred dividend is 'fully participating as to dividends'?

e.g. 100 shares of 5% preferred stock, par value $10/share, fully participating.

200 shares of common stock, $1 par value

Declare dividend $1,000.

How much go to preferred. How much go to common?

It means the common shareholders would be entitled to equivalent rate of preferred.

First pay preferred dividend for the year ($100 x 10 x .05 = $50)

Next pay common shareholders equivalent % dividend
(200 shares of common x $1 par x 5% preferred rate) = $10 dividend for common

If there's excess dividend ($1000 - 50 - 10 = $940), allocate between both classes of stock by total par value of shares.

Total value of preferred: $1000
Total value of Common: $200

% of preferred $1000/1200 = 83.33% of $940 = $783.33 = preferred, remainder $156.66 go to common

$783.33 + 50 = $833.33 total to preferred
$156.66 + 10 = 166.66 total go to common

You have 10% preferred dividend but didn't declare dividends in prior years but declalre dividends in current year. Do you have dividends in arrears?

Yes

You borrow $10,000 and sign a 3 year note bearing 12% interest COMPOUNDED annually on jan 1 2001. interest is due in full at maturity on december 31 2003.

How much accrued interest do you record on Dec 31, 2002?

Year 1: $10,000 x 12% = $1200
Year 2 (compound) $11,200 x 12% = $1344

1344 + 1200 = $2,544

You receive nonrefundable advance payments for custom orders. Are these advance payments a liability?

yes.

Fair value option for warranty obligations

Can only happen if the warranty obligation can be settled by contracting with a third party.

If gross wages is $20,000, Federal withholding payable is $2500, FICA taxes is $1400, what is wages payable?

$20000
- 2500
-1400
= $16100 net

Who pays federal / state unemployment insurance tax?

Employers

Deferred tax liability

Balance sheet accumulation of income taxes that are due in a future period due to reversing temporary differences that increase future taxable income. To simply reporting of deferred taxes, all deferred tax assets and DTLs are classified as noncurrent.

Calculation of bonus

example:

25% bonus to income over $100,000 earned.
Income is $160,000 BEFORE BONUS is deducted.

25% x (Income - $100,000 - Bonus) = Bonus

$15,000 - .25bonus = bonus
$15000 = 1.25bonus
= 12,000

What's a balloon note?

A long-term financing that requires a large one-time payment (ie the remaining balance) at the end of a loan's term. This payment is considerably larger than any previous ones and allows for smaller payments up front.

You didn't pay your preferred dividends of $20,000 last year, but paid $10,000 in preferred dividends this year. What's your dividends in arrears?

$30,000

True/false. Actual warranty repair costs are booked as expenses.

False. Estimated warranty repair costs are booked as expenses. Actual warranty repair costs reduce estimated warranty liability.

Accretion Expense is calculated as..

A. FV of asset retirement obligation x credit adjusted risk free rate
B. FV of asset retirement obligation x risk free interest rate
C. Carrying value x credit adjusted risk free rate
D. Carrying value x risk free interest rate

A. Accretion expense = FV of the Asset retirement obligation x credit adjusted risk free interest rate